The Beginner’s Guide to Robo Advisors

What are Robo Advisors?

Robo advisors are digital platforms that trade on your behalf using algorithms and little human supervision. A typical robo advisor walks you through your financial situation, plan and age when considering how much risk they should take on your behalf.

The goal of the robo advisor is to make investing into the stock market simple for the investor. Rather spending hours a day researching companies and managing your portfolio, robo advisors are more of a hand off approach where all you have to decide on is how much money you want to invest into the market.  

The industry has experienced explosive growth as a result; client assets managed by robo-advisors hit $60 billion at year-end 2015 and is projected to reach US$2 trillion by 2020 and $7 trillion worldwide by 2025.

When choosing a robo advisor, you should be looking for features such as easy account setup, robust goal planning, account services, portfolio management, and security features, attentive customer service, comprehensive education, and low fees.

Robo Advisors vs. Wealth Management

Robo advisors in theory works no different than your typical wealth management service such as mutual funds. You the investor puts in money, and the robo advisor determines where best to put that money. The major differences are in the fees and flexibility.

Wealth management typically charges you between 2-3% in management fees, whereas robo advisors charges as low as 0.2%. If you have a portfolio of $100,000, that’s $1,800 in savings just in management fees.

There are also incredible amounts of flexibility when investing into a robo advisor platform. You can invest as little as a dollar by simply clicking invest on the platform. Investing into mutual funds often requires you to call your financial advisor and sign a few documents in order to process the investment into the funds.

One incredible feature on robo advisors is the ability to set your account to auto deposit. You can either set a fixed amount to invest on your pay day or automatically invest if it goes over a certain amount in your chequing account.

Key Trends in Robo Advisors

The study by J.D. Power suggests that millennials have now accumulated enough wealth to be in the “sweet spot” for engaging a wealth manager. Digital advisory is also popular among Xennials–those born between 1978 and 1983– with 19% of them using a robo.

In addition, about 28% of millennials rate their satisfaction with the robo-advisor experience higher than their rating for their full service firm, according to the study.

Robo advisor services are here to stay. Though once skeptical of robo-advisers, more bankers are starting to embrace them. This change in attitude is helping contribute to rapid growth in what is still a small segment of the market.

Though robos — which provide algorithm-driven investment advice — make up a small portion of the market, they are projected to grow into a $7 trillion industry in the next decade, according to research from Deloitte. That would equate to 15% of all U.S. retail assets under management.

“We do not expect to see any major player that does not have some sort of robo by the end of the fiscal year,” said Kendra Thompson, North America lead for wealth management with Accenture. “All of them — all of the big ones — have big plans in the works.”

Benefits of Using Robo Advisors

Low Cost: Robo-advisors typically charge between 0.2% – 0.5% annually when compared to 2% – 3% for mutual funds.

Little to No Minimum Asset Required: You can get started for free with $0. For most robo advisors, there isn’t a minimum investment amount or any requirement that you need at least $5,000 invested in their platform.

Easy to Invest Money: It’s a click of a button. As long your chequing account is linked. All you need to do is select how much you want to invest and when. If you want it to be simpler, you can set it to auto deposit every 2 weeks and forget about it.

Risks of Using Robo Advisors

No Control on Investments: The point of investing in a robo advisor is having a robot invest for you. This means you will have little control over specifically which companies or industries to invest in. Robo advisors do offer optimized portfolios for socially responsible investing (SRI), Hallal investing, or tactical strategies that mimic hedge funds.

Recommended Robo Advisors

Betterment: Betterment is a clear leader among robo-advisors, with two service options: Betterment Digital has no account minimum and charges 0.25% of assets under management annually. Betterment Premium provides unlimited phone access to certified financial planners for a 0.40% fee and $100,000 account minimum.

Wealthsimple: Wealthsimple’s socially responsible and halal-compliant portfolios cater to values-based investor. It offers no account minimums and charges 0.5% of assets under management annually. Wealthsimple Black is offered when you invest $100k+ across your Wealthsimple accounts. It offers lower management fees at 0.4%, free financial sessions with expert advisors, and VIP lounge services with Priority Pass.